Commodity price run-ups likely to outstrip cost hike

March 14, 2008|By Mikkel Pates, Agweek Magazine

FARGO, N.D. -- The prices of crop inputs are rising, but likely not keeping up with the increases in grain prices, says Andrew Swenson, a North Dakota State University extension economist in Fargo, N.D. "It's mixed. A lot of the gains are eaten up by increasing costs," Swenson says. "But prices of the crops are going up faster than the increase in the costs. It's still a net positive." This confirms what ag lenders and farmers are saying privately -- profits that were "insane" in 2007 so far are looking to stay healthy in 2008. Swenson says exact income projections are hard to pin down, especially as deals are being completed and adjusted between farmers and their landlords, seed suppliers and chemical and fertilizer companies. There will be a big difference this year between farmers who locked down fertilizer and seed prices early and those who didn't, he says. And there is uncertainty on the revenue side. Officially, policymakers and economists look at two sets of numbers and systems for estimating how farmers are doing. One is crop budget forecasts and in hindsight through the North Dakota Farm Business Management Education Program. One is foresight; the other is hindsight. The only reliable government forecast for potential crop profitability came out in December, and it really isn't designed for that. This crop budget forecast is crop by crop, region by region for nine regions -- an estimation of crop budgets, showing which crops could be expected to make money in 2008, based on their own input costs and returns. This is designed as a guide, or tool for farmers to de decide which crops to plant. "We always stress guys put in their own numbers," Swenson says. He also says there is a big demand for these numbers from commodity buyers and bankers. In December, Swenson called these numbers "historic, the best I've seen in my 17 years of doing budgets. I've never seen costs go up so high and I've never seen prices go so high. Everything on the revenue and crop sides leaps upward, but the margin increased, too." That was across almost all crops, except rye and oats. Most years, it's tough to show any of the crops will have any profits at all in a coming year. Typically, only crops such as dry edible beans, confection sunflowers and soybeans in the southeast part of the state would have a profit. "Many years wheat -- our most ubiquitous crop -- it's tough to show a 'profit' for the average guy," Swenson says. "This year, basically all crops projected a profit except for a few minor crops." But a lot of prices have changed -- even since early December -- when those budgets were figured. Still, potential profit margins are still historic, but there are a lot of ifs. Typically, the cost side of things doesn't change as fast as revenue. "What is extremely difficult to project are yields," Swenson says. "You don't know what the year is going to be like in yields and price at the time of harvest." The crop budget forecast shows a return for "all labor and management" and assumes the producer provides all of that. These crop budgets don't show the direct and countercyclical payments that come to the farmer, which can be important to "whole farm income." The primary system for figuring all costs isn't a forecast at all, but a look back based on records from enrollees in the North Dakota Farm Business Management Education Program. Those figures for 2007 won't be available statewide until May. This offers only a minor only a clue about what might be coming in 2008. Importantly, these adult farm management numbers are a better reflector of the actual total income farmers are dealing with, including government money. Swenson produces a map that breaks down the government payments for the various regions. Average per-acre direct payments in a region range from an average of $13 per acre in the southeast to as little as $6.25 an acre in the southwest. "If you have a 2,000-acre farm, that's $26,000 of income that won't show on the 'crop budget' but will on the Farm Business Management records," he says. "It's income, but it's not something that helps you evaluate one crop versus another. It's a whole farm thing." The farm management record system also counts the cost of hiring help, which the crop budget forecasts don't, Swenson says. It's been widely reported that commodity prices have increased significantly since December, Swenson says, but he notes that it is difficult to know how much has been sold at these higher prices. NASS does it for what's been sold on a cash basis, but that doesn't keep track of what's been forward-contracted. In a related issue, most farmers do not deal directly with futures markets and incur few direct marketing costs. "Usually when guys forward-contract, they call the elevator and do a hedge-to- arrive or a forward cash contract," Swenson says. "They'll fix the futures price and set the basis at a later time, or they'll forward cash-contract, so they know what price they're getting." And although futures prices look good on paper, farmers are apprehensive because they have a lot of dollars going out. "If they can capture these prices, an average yield should be extremely profitable," he says. "But still, what can go wrong? There's a lot more money at risk and invested than ever before. With crops that have revenue insurance, you should be able to protect yourself. But how is this going to shake out?" It's getting tougher to make projections. "The cost structure has exploded; it's going to be up here," Swenson says, raising his hand above his nose, and if commodity prices (go down) you're going to be stuck with costs." For seasoned farmers, all of this seems eerily reminiscent of the 1970s and 1980s, when prices went up and then collapsed. Not all of today's farmers went through that. "It makes sense that younger guys, who haven't lived through or seen the previous wreck in the 1980s may think this is going to go 'great guns' forever. Lenders, probably, have their eyes open a little more," Swenson says. Spreadsheet analysis show very strong profit potential for 2008, but Swenson adds, "if this thing hangs together." Considering how things are moving, the potential for bigger profits is probably the best in the eastern counties of the state where corn and soybean prices are slugging it out. In the west, the spring wheat and durum scenario also looks good, but the input costs -- especially seed -- will have a bigger effect. "If you haven't bought your seed, it's probably triple or more what it was last year," he says. "Last year, to plant an acre of durum, it might have been $14 in seed costs, and this year, it's in the neighborhood $50." One factor to keep in mind is that seed prices are based on old crop prices, with spring wheat selling in the $20-per-bushel-plus range. Farmers are buying it to produce for a new crop in which prices are at a still $10 per bushel. "Durum looks like it could be real strong, but the problem with wheat and durum is that there's more quality risk at harvest," Swenson says. "With corn and soybeans, you know more what it's going to be. You can get hammered with quality discounts on durum." Swenson says durum contracts appear very strong and will attract acres, but it's a fickle crop. Seed costs are significant in corn and soybeans, too, but they haven't increased as much as in durum and spring wheat. Some farmers who kept some wheat that they planned to sell for seed now have, or will, sell it for grain. "They're thinking, I've got to capture this," Swenson says. "I can't wait and gamble the prices are going to go up." He says that attitude alone will tend to make seed more scarce -- and more expensive.